Bankruptcy System Provides Means to Shut Down Massive Cattle Fraud Case
Hoyt and his office manager, Phyllis M. King, were convicted of multiple counts of bankruptcy fraud related to the involuntary chapter 7 bankruptcy cases of W.J. Hoyt Sons Management Co. Ltd. and W.J. Hoyt Sons Ranches MLP, two partnerships that Hoyt controlled. David R. Barnes, a general partner in one of the partnerships, pleaded guilty to bankruptcy fraud. Hoyt and three other co-defendants also were convicted of, or pleaded guilty to, other charges. The criminal convictions of Hoyt, King and co-defendant David L. Cross are currently on appeal to the Ninth Circuit Court of Appeals.
Despite an exhaustive investigation, the millions of dollars that were lost have not proven recoverable. However, the bankruptcy court and the U.S. Trustee ultimately halted Hoyt's fraudulent scheme by taking actions that cut off the solicitations and investor payments—which had continued secretly even after orders for relief were entered in the involuntary bankruptcy cases.
Cattle Investment Scheme
Hoyt bred and raised cattle and sheep. In fact, he claimed to have the largest Shorthorn breeding operation in the country. By the early 1970s, Hoyt was soliciting investors who were told they could shelter income from taxes by purchasing interests in Hoyt livestock. He prepared tax returns claiming large deductions that flowed through to investors and initially resulted in substantial tax refunds. Seventy-five percent of the refunds were automatically funneled back into Hoyt's operation.
Unfortunately, Hoyt's operation did not own anywhere near the thousands of cattle that Hoyt claimed, and the livestock owned were far less valuable than Hoyt represented. To make the herd appear larger, false computerized book entries were created. These book entries were so unreliable that in some instances the records showed calves giving birth to their mothers.
Hoyt devised a complex web of more than 270 entities that made it difficult for investors, the Internal Revenue Service (IRS) and others to learn the true state of his assets and financial affairs. In addition to creating scores of investor partnerships, Hoyt formed master limited partnerships to manage the overall operation, partnerships to manage livestock, partnerships to own real property, partnerships to operate feedlots and prepare tax returns, and a bewildering array of other entities. These entities inexplicably appeared, disappeared, changed names, changed functions, and lost or gained assets and partners.
In 1995, a group of investors obtained a multimillion-dollar judgment against Hoyt and various Hoyt entities. The investors eventually filed involuntary chapter 7 bankruptcy petitions against W.J. Hoyt Sons Management Co. Ltd. and W.J. Hoyt Sons Ranches MLP, the two partnerships at the center of Hoyt's operation. In June 1997, orders for relief were entered against the two debtor entities in the Portland Division of the U.S. Bankruptcy Court for the District of Oregon.
Administration of the Bankruptcy Case
All of the chapter 7 trustees in the district declined appointment in the Hoyt bankruptcy cases—an unprecedented event in the District of Oregon. It was clear that the cases involved hundreds of interrelated entities with confusing schedules of assets and liabilities, and offered little likelihood of recovery for creditors. When he could find no private trustee willing to serve in the cases, Jan S. Ostrovsky, the Region 18 U.S. Trustee, appointed himself chapter 7 trustee pursuant to 11 U.S.C. §701(a)(2).
Ostrovsky assembled a multi-state team from his region to administer the case. The primary members of the team were attorney Neal G. Jensen, the Assistant U.S. Trustee in Great Falls, Mont.; attorney Pamela J. Griffith, the Assistant U.S. Trustee in Portland, Ore.; and Allen C. Painter, a certified public accountant who is the bankruptcy analyst in the Portland office.
To gather information about the business operations, Jensen questioned Hoyt at the meeting of creditors. Hoyt confirmed the sworn statements in the bankruptcy schedules, signed by general partner Barnes, that the debtors had virtually no assets. He also testified that the debtors had not been in business since 1995.
After the meeting of creditors, the trustee directed the U.S. Post Office to forward the debtors' mail to him. The mail contained numerous checks from investors payable to one of the debtors, contradicting Hoyt's testimony that the debtors were not in business and that the livestock purchase notes from investors were uncollectible.
The trustee demanded an explanation for these payments and the turnover of any similar payments. He instructed the debtors that they were not authorized to continue their operations and advised the parties that conversion of bankruptcy estate property could have serious consequences, including criminal liability.
The trustee did not receive a direct response to his demands, nor were the assets or requested information turned over. Instead, the mail and checks soon diminished to a trickle. The trustee later learned that, shortly after the redirection of the debtors' mail, office manager King wrote an urgent letter to investors advising them to mail their payments to a different Hoyt entity due to a "problem with the mail." Painter later calculated that more than $1.6 million in investor payments was diverted by Hoyt and his associates after the entry of the orders for relief.
The trustee also discovered that Hoyt was still operating a livestock investment business. The trustee pursued injunctive relief against the Hoyt principals and related entities, obtaining temporary restraining orders and permanent injunctions that precluded the sale of or interference with livestock and investor payments. Notwithstanding these efforts, Hoyt continued to direct the operation of the debtors' business and divert estate assets.
Once it became evident that Hoyt was still collecting money from investors and running the livestock operation, the trustee formulated three goals for the administration of the bankruptcy case:
- Shut down the Hoyt business operation to preserve bankruptcy estate assets and prevent further harm to investors;
- Collect as much money as possible for creditors through asset liquidation; and
- Refer and assist in a criminal prosecution of Hoyt and others involved in the fraud.
The goal of shutting down the ongoing business was complicated by the proliferation of entities that Hoyt had formed, including an entity under whose guise Hoyt continued to operate. Jensen and Painter traveled to the business premises in remote Burns, Ore., and ultimately obtained an agreement that called for the cessation of operations, the liquidation of assets, and the determination of asset ownership at a later date. The Hoyt operation finally terminated in February 1998.
The trustee's immediate concern after the business shut down was to locate and sell livestock. Hoyt was evasive about the livestock's location, and continually insisted that they were owned by entities or individuals other than the debtors. Nonetheless, the trustee eventually sold around 1,500 cattle for approximately $800,000, after hiring cowboys to round them up in California.
Identifying other assets was difficult because the debtors' schedules and Hoyt's testimony were unreliable. Jensen and Painter retrieved from offices in Burns, Ore.; Orovada, Nev.; and Elk Grove, Calif., thousands of boxes of records containing millions of documents. The two men loaded documents into a rental truck and hauled them to Portland, where Painter reviewed them. Jensen, with Painter's assistance, conducted scores of Fed. R. Bank. P. 2004 examinations of Hoyt principals and former employees. The examination of Hoyt alone lasted nearly a month.
It became evident that the many entities in the Hoyt organization had not acted independently since at least 1995. The trustee therefore filed a complaint for substantive consolidation, which sought to combine all of the assets and liabilities of the debtors with those of the related entities. In November 1998, Bankruptcy Judge Elizabeth L. Perris entered a judgment of substantive consolidation that consolidated all of the entities as of the date that the involuntary petitions were filed.2
To date, the trustee has collected more than $2.8 million from the liquidation of assets, including livestock; hidden cashiers' checks; and fraudulent conveyance, malpractice and avoidance actions. Impediments included confusing or contradictory information about asset ownership, causes of action ostensibly beyond the statutes of limitation, and property with seemingly impossibly clouded titles. Although the trustee hired an expert to track the flow of monies and the movement of cattle, little of the invested money could be recovered. The trustee is still collecting assets.
In pursuit of the third goal, the trustee made a criminal referral to the U.S. Attorney's Office and the FBI. The referral included allegations of asset concealment, false oaths and false statements. The bankruptcy fraud charges became part of a superseding indictment returned against Hoyt and five other defendants in June 1999.
Assistant U.S. Attorney Allan M. Garten pursued the case, which was the largest financial fraud case ever prosecuted in the District of Oregon. Painter provided almost full-time assistance in the criminal case during the year preceding the trial.
After a five-week trial, a federal jury convicted Hoyt and two associates on multiple criminal counts. Hoyt was convicted of conspiracy, mail fraud, bankruptcy fraud and money laundering. David L. Cross, a former general partner of one of the debtors, was convicted of conspiracy and 11 counts of mail fraud. Former office manager King was convicted of bankruptcy fraud and money laundering. Three other defendants who were indicted pleaded guilty prior to the trial.
All of the defendants received significant prison sentences. Hoyt is likely to spend the rest of his life in jail.
In this case, the trustee's first goal has been accomplished: The Hoyt operation has been shut down in order to preserve estate assets and protect future investors. The second goal, the liquidation of assets, continues. The third goal, the prosecution of Hoyt and other principals for bankruptcy crimes, has also been met through the combined efforts of the trustee and the U.S. Attorney.
While the huge size and complicated facts of this case make it unique, its resolution came about through the use of procedures available to the U.S. Trustee and private trustees in every bankruptcy case. The trustee's ability to take control of business operations, seize assets, conduct discovery of records, use Rule 2004 exams to question principals and employees, and obtain an order for substantive consolidation of related entities enabled the trustee to untangle Hoyt's complex business operations. All in all, the bankruptcy system provided an effective framework for halting the ongoing fraud.
1 All views expressed in this article are those of the author and do not necessarily represent the views of the U.S. Trustee Program or the U.S. Department of Justice. The author wishes to thank the following colleagues for their assistance in preparing this article: Jan Ostrovsky, U.S. Trustee for Region 18, Seattle, Wash.; Neal Jensen, Assistant U.S. Trustee, Great Falls, Mont.; Allen Painter, Bankruptcy Analyst, Portland, Ore.; and Jane Limprecht, EOUST. Return to article